The Internal Revenue Services (IRS) has announced a second and final offering of a voluntary disclosure program (VDP) to organizations who filed for and received tax credits for the Employee Retention Credit (ERC) program but are ineligible to receive the credit. This second VDP program can provide eligible taxpayers with relief from penalties, interests, ERC audits, and potential civil or criminal prosecution and is available for the 2021 ERC tax periods.
While the second VDP is available through November 22, 2024, it is important that any organization that is ineligible for the program apply for the voluntary disclosure program before receiving one of 30,000 clawback notices that the IRS has been sending and will continue to send this fall. Those letters demand repayment of improper claims. Companies who receive one of these IRS notices are not eligible for the second VDP program.
Employee Retention Credit Overview
The pandemic relief Employee Retention Credit (ERC) program was available to businesses and tax-exempt organizations that met specific criteria in 2020 and 2021 to offer them a refundable tax credit to help sustain them during government required shutdowns. Unfortunately, due to aggressive and predatory marketing, many organizations were misled into believing that they qualified for the ERC or that there would be no harm in applying for the program if they weren’t. This is incorrect.
Billions of Tax Dollars at Stake
The first ERC voluntary disclosure program ended in March 2024 and resulted in the IRS receiving over 2,600 applications that disclosed over $1.09 billion worth of credits. The 30,000 letters being sent expect to reverse or recapture another potential $1 billion.
A separate 28,000 disallowance letters have been sent to taxpayers in recent weeks that the IRS estimates will prevent up to $5 billion in improper payments. 460 criminal cases have been initiated with potentially fraudulent claims worth nearly $7 billion. The IRS also has a claim withdrawal process for those with pending claims which remains open for taxpayers. 7,300 entities have withdrawn $677 million in claims thus far.
ERC Voluntary Disclosure Program
The aggressive marketing by processors who offered assistance to businesses in processing ERC claims resulted in the IRS being inundated with invalid claims. This forced them to issue a moratorium on processing all claims as they worked to digitize the data they received to enable them to better insure compliance. The moratorium has now been lifted and the IRS is preparing to process 50,000 claims that they believe are at a low risk of noncompliance.
The IRS encourages anyone who has worked with a third-party processor to seek the advice of a trusted tax professional to help them determine their true eligibility. Those professionals can also assist with processing a withdrawal of pending claims or ERC tax credit refunds not yet cashed, as well as aid them in completing an application for the ERC voluntary disclosure program.
IRS Warning Signs of Incorrect Claims
With a complex program such as the Employee Retention Credit, it is understandable that many honest business owners fell prey to believing that unscrupulous processors could help them navigate the process. It’s for that reason that the IRS made these voluntary disclosure programs available to business owners.
To help taxpayers determine if they may be ineligible for the Employee Retention Credit, the IRS has published 12 warning signs to help businesses understand if an ERC credit was warranted or not in any given tax period. Eligibility often varied from one tax period to another as many factors had to be considered to determine eligibility. Some of these include government-ordered suspended operations, essential business categories, ensuring the exclusions of family members’ wages and those considered in a Paycheck Protection Program forgiven loan, etc.
ERC 2nd VDP Round
The second ERC voluntary disclosure program that expires on November 22, 2024, allows businesses to repay a discounted rate of only 85% of the ERC claims that they made and is limited to the tax periods in 2021. This lower rate is to help alleviate the burden on businesses that paid a commission percentage to a credit mill. The first ERC VDP required repayment of only 80% of the funds received.
For businesses that are unable to repay the full amount of ERC funds due to be returned, the IRS will make installment agreements available—but those would be subject to penalties and interest, where full payments would waive those expenses.
Seek Trusted Advice
This final window of opportunity to apply to an ERC voluntary disclosure program should be acted upon promptly by any business who is unclear of whether their application for the credit was valid.
The State and Local Tax (SALT) experts at REDW assist businesses and tax-exempt organizations with analyzing their unique situations and processing withdrawals or VDP applications.
Reach out today for a free consultation.
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